5 Answers
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Major David Wesely took his usual wargaming group and tried something a little different. Instead of having them command armies he set down the two opposing leaders in a Prussian town before the battle, their troops nearby but not on stage. To give the other players something to do he let them control other people around town: the Mayor, a school Chancellor, some revolutionary students, etc. The humble town was the eponymous Braunstein, “brown stone” in German.

This style of play marked a subtle shift in gaming, from commanding units to controlling individual personalities. As Robbins says, he was "the very first GM." Wesely explains:

The idea of having an all-powerful Referee who would invent the scenario for the game (battle) of the evening, provide for hidden movement and deal with anything the players decided thatthey wanted to do was not taken from Kriegspeil but was mostly inspired by 'Strategos, The American Game of War', a training manual for US army wargames

One of the players in that game was Dave Arneson. Arneson truly understood how to play in this new type of game, using his imagination. When Weseley joined the Army Reserves, Arneson started running his own games, but set in a fantasy world instead of Prussia. He used the Chainmail rules to handle combat. Arneson called his world Blackmoor.

One thing led to another. Arneson met up with Gary Gygax and they exchanged ideas and rules. Dungeons and Dragons was the eventual result.

Impact

So to summarize why Braunstein is important to hobby gaming:

Braunstein was the first game to popularize the idea of one player = one character.

Players weren't limited to actions in a rule book. It allowed players great latitude to take creative actions that would be interpreted by a game master.

Dave Arneson, a player in the first Braunstein game, influenced Gary Gygax and helped write the first D&D rules.

Possibly, Braunstein ("brown stone") created a naming convention that was used by Arneson ("Blackmoor") and Gygax ("Greyhawk").

Interesting Tidbits

Ironically, Weseley did not like the term "role-playing game," instead preferring "adventure game."

Weseley shares credit for inventing the RPG. He says that Micheal J. Korns published Modern War in Miniature, "a set of miniature rules with all of the features of an RPG," in 1968. This was a simultaneous invention, since Wesley and Korns had never met at that time.

Braunstein was the first step away from war-games towards roleplaying games as we know it for the following reasons:

there were more thant two sides fighting each other

there was a referee to adjucate situations (but there was also a lot of interaction between players that happened without the referee knowing about it; when Wesley tried to "fix" this, the game flopped)

the game wasn't a zero sum game; since it had a referee the referee was able to introduce new resources and facts during play

the game ended up having no clear winners and to Wesley's surprise, players enjoyed it anyway; this is very unlike a war-game where the player's goal is to win by achieving some known victory condition

there were multiple non-exclusive goals; in a war-game one side might be trying to take a bridge and the other side would try and hold it, but in Braunstein the banker, the mayor, the student leader, the officer, and all the other characters had different goals that required some form of diplomatic (or violent) resolution

players played one character (who may or may not be in charge of a larger, more traditional unit of armed forces); this was different from war-games where players usually played two opposing sides of a conflict

All of the above is based on my understanding of the interview at Theory of the Closet.

In an interview with David Wesely his description of the Brausteins shared elements of a Live Action Roleplaying event. In that much of the action was generated by the players interacting with each other. So he had a triple innovation with the first Braustein.

Brauenstein was a character scale wargame with elements of Roleplaying, and essentially was the first RPG. Not that Dave Weseley, its author and GM, intended it that way, per se.

Several other wargames used the GM adjudicated "do anything the GM will let you" mode; some date back to the turn of the 20th Century. (cf Kriegsspiel, ca 1890 in that mode, and less open as far back as 1812.)

Several other wargames had character scale play, but not as characters, merely as units.

Brauenstein combined 1 player to 1 character and GM adjudicated open action choice. It was also a sandbox-type game: "Here's the initial situation, what do your units do?" It also featured PVP action. (Dave Arneson, personal message via email, 2004)

Dave Weseley was essentially running a simulation. When Dave Arneson used his imagination to come up with novel solutions to tactical problems, and began thinking in character, and getting the GM to respond likewise, the move to true Role-Playing Games began.

Arneson's later campaigns with in-character play lead he and E. Gary Gygax to develop experience rules, fortification rules, etc, and those expansions to the Chainmail Miniatures game became the first edition of Dungeons and Dragons.